Bridge Loans: What They Are, How They Work, and More
In a perfect world, funding would always be on-time and homes would always sell when you’re ready to move. Unfortunately, the stars don’t always align just so, and there’s sometimes a gap that needs to be bridged.
Whether you’re an investor, home owner, or business professional, a bridge loan might be the solution you need. These financing options are different from traditional loans, though, so make sure you fully understand how it works, common rates and fees, and the pros and cons.
What is a bridge loan?
A bridge loan is a short-term loan used until a borrower secures permanent, long-term financing. Also sometimes referred to as bridge financing, gap financing, interim financing, or swing financing, these loans “bridge” the gap until secure financing is available.
Bridge loans are usually taken out for a term of two weeks to one year, although some lenders will finance bridge loans for up to three years. They can be a type of hard money loan—requiring higher interest rates and backed by collateral rather than credit.
How does a bridge loan work?
Bridge loans are commonly used in real estate, to help finance a gap between purchasing a new home and selling the existing one. The borrower takes out a bridge loan as short-term financing until they can secure a long-term, traditional mortgage. This gives the borrower some added flexibility.
Because bridge loans are such relatively short-term financing agreements, the interest rates are significantly higher than those of standard mortgage loans or lines of credit. Some lenders require good credit scores and proof of income, as they do for a traditional loan, while hard money lenders will issue bridge loans based entirely on the equity of the collateral.
Note: Loan Ranger Capital is an experienced Texas hard money lender, which means we lend money based on the value of the asset. Typically, we do not even run credit checks.
Bridge Loans for Business
Bridge loans can also be used by business owners and professionals, to cover large purchases or temporary gaps in cash flow. For example:
- If a corporation is purchasing another business, they may use a bridge loan to secure the purchase while traditional, long-term funding is being approved.
- A growing business that is finalizing a round of funding may use a bridge loan to cover expenses until the funding comes through.
Bridge Loan Rates and Fees
Interest rates will vary, but it’s important to remember that they will be higher on a bridge loan than on a traditional, long-term loan. This is because the lender only has about one year (instead of 30) to make a return on their investment.
Each lender will require different fees for a bridge loan, but some possibilities to consider and ask your lender about include:
- Administration fees
- Appraisal fees
- Closing costs
- Notary fees
- Origination fee
- Title fees
- Wiring fees
Most bridge financing lenders do not charge prepayment penalties.
Note: Contact us for current interest rates on bridge loans in Texas.
Do you need a down payment for a bridge loan?
You do not need a down payment for a bridge loan, but you need at least 20% equity in your existing primary residence.
Bridge Loan Benefits
Bridge loans were designed to meet a very specific financing need and provide many benefits to that end:
- Make a contingency-free offer. In competitive, sellers markets, making a contingency-free offer (an offer on a new house that does not depend on you selling your existing house) can help ensure that your offer is accepted over others.
- Enable a quick move. If you need to move fairly soon—for a new job, family needs, etc.—but aren’t in a great place to sell your home, a bridge loan can help get you into your new house quickly.
Bridge Loan Drawbacks
There are challenges to bridge loans as well, including:
- High interest rate. It makes sense that a very short loan would come with a higher interest rate, but it is still something you need to be able to manage.
- Two mortgages. If you haven’t paid off the mortgage on your primary residence, you will need to continue those payments as well as the payments on the bridge loan.
While not necessarily a drawback, it is also important to remember that many traditional mortgage lenders don’t offer bridge loans, since they’re a specialized type of financing. That means you may have to find and work with a new lender in addition to your long-term mortgage lender.
Is a bridge loan a good idea?
Bridge loans were designed to meet a very specific need, and they do that well. If you need to move quickly, or finally found your dream home, and your income will cover payments on two loans (your existing mortgage and the bridge loan), then a bridge loan is a great idea. Securing a bridge loan can make sure that you don’t miss that once-in-a-lifetime opportunity!
If you’re not in a hurry to move, and/or you’re not sure if you can handle multiple loan payments, then a bridge loan probably isn’t for you.
Bridge Loans in Texas
If you are a business or a homeowner in need of a bridge loan anywhere across the great State of Texas, Loan Ranger Capital is here to help. We are experienced hard money lenders who pride ourselves on outstanding customer service and easy loan terms.